In healthcare, financial accuracy is more than a back-office concern; it directly affects a provider’s ability to serve patients, plan for their growth, and remain in compliance with regulations. Understanding how financial transactions are recorded and choosing the right accounting method is important. While some small practices still use cash accounting, the majority of healthcare organizations rely on what’s known as accrual accounting to capture a more complete financial picture. This method records revenues and expenses when they are earned or incurred, rather than when cash is received or paid, providing a more accurate reflection of current financial activity.
As readers of our blogs know, we work with all types of clients in various industries. But often our work is focused on healthcare businesses. This blog explores how accrual accounting works in healthcare and how it compares to cash-based methods. We’ll also walk through how it supports smarter financial decision-making and how to avoid some of the common missteps that can lead to reporting errors or regulatory trouble.
Understanding Accounting Methods in Healthcare
Every healthcare organization, from smaller private practices to multi-site hospital systems, must decide how it records revenue and expenses. Cash accounting is straightforward: income is recorded when money is received, and expenses are documented when bills are paid. This simplicity is attractive, especially for smaller firms. However, it can produce a distorted financial picture for organizations where services are rendered long before payment arrives. As readers working in this industry know, this is common in environments with insurance billing, Medicare reimbursements, and installment payment plans.
Accrual accounting, on the other hand, also known as the accrual method, records revenue when it’s earned and expenses when they are incurred, regardless of when cash changes hands. This method provides a more accurate and consistent snapshot of performance and is typically required under Generally Accepted Accounting Principles (GAAP), the standardized framework that governs accounting.
Why GAAP Requires Accrual Accounting
GAAP serves as the foundation of professional accounting standards in the U.S. and is essential for compliance, regulatory reporting, and maintaining standards in healthcare organizations. For example, consider a hospice that bills Medicare for services delivered over the course of a month. Even if payment doesn’t arrive until six weeks later, GAAP requires that revenue be recorded in the period care was provided. This process is known as revenue recognition and gives a more realistic view of the financial situation, helping managers make decisions about staffing, capital improvements, or patient load capacity.
GAAP also governs how organizations recognize deferred revenue, estimate bad debt, and report on assets, liabilities, and net assets. These are areas that can materially affect both internal operations and external reporting, especially for nonprofit hospitals that must file IRS Form 990.
Accrual Accounting in Practice
Let’s consider a case to illustrate how accrual accounting plays out in a day-to-day healthcare operation.
Case Study: North Valley Therapy Group
North Valley Therapy Group is a mid-sized medical practice specializing in behavioral health that treats patients with a range of mental health conditions. The clinic’s therapists deliver services daily, with reimbursement coming from a mix of commercial insurers, Medicaid, and patient copays.
Before switching to accrual accounting, North Valley used a cash basis system, under which the practice received payments at unpredictable times and recorded revenue only when cash came in. Monthly reports showed unpredictable revenue swings. In April, the clinic received a large Medicaid payment from services rendered in February, creating an artificial spike in income, just as expenses from new hires hit the books. Leadership was making strategic decisions based on distorted figures.
After moving to accrual accounting (and working with a healthcare-focused CPA firm), the organization could finally track revenue by service date, not payment date. Now, the practice recognizes revenue when services are delivered. This helped them forecast with greater accuracy, identify when certain therapists were “underbooked,” and better evaluate the cost-effectiveness of group therapy sessions.
Comparing Cash and Accrual Methods
While accrual accounting is often mandatory for larger or more complex healthcare providers, cash accounting still has its place, particularly for solo practitioners or very small clinics with simple operations.
Under cash accounting, a dermatologist who collects full payment at the time of service might find it easier to manage bookkeeping. However, it’s important to note the difference between income earned and income received: under the cash accounting method, only income received—when the patient or insurer pays—is recognized. But once the practice begins offering payment plans, billing insurers, or accepting Medicare, accrual accounting quickly becomes necessary for accuracy and compliance.
Still, even for small providers, relying on cash accounting can cause problems. For instance, if a practice pays for an expensive piece of diagnostic equipment in March but doesn’t receive reimbursement (income received) until June, cash accounting will show a steep loss for the month of March and a false profit in June. This disconnect creates misleading performance trends.
Healthcare Practices: Day-to-Day Accounting Realities
For most medical practices, day-to-day accounting requires attention to detail and a proactive approach to financial management. Managing accounts receivable is a daily reality for medical practices, as payments for patient services often arrive weeks or months after care is delivered. Practices must also keep a close eye on accounts payable and maintain accurate inventories of medical supplies and equipment to ensure that all expenses are properly accounted for. This level of detail is essential for accurate financial reporting and for meeting the requirements of the Affordable Care Act and other evolving regulatory standards.
Staying current with accounting standards and regulatory requirements is so important, as noncompliance can lead to financial penalties or jeopardize a practice’s reputation. This is something we at Walters are particularly proud of when working with clients. We stay on top of changing regulations and make sure our clients know about them. Today, this seems to be even more of a concern as there are many rapidly changing elements to government programs and oversight.
Sliding Scale, Pro Bono, and Community Care: How Accrual Accounting Adds Clarity
When people hear the term “charity care,” they often think of large nonprofit hospitals reporting millions in uncompensated services to meet IRS or grant requirements. But for most independent healthcare providers like clinics, therapy practices, and small group offices, community care shows up in different ways. Sliding-scale fees, hardship discounts, and occasional pro bono sessions are more typical in these settings, especially for providers who serve lower-income or uninsured populations.
That’s where accrual accounting also proves its value. Rather than letting these services blur into unpaid balances or bad debt, accrual-based bookkeeping gives providers the chance to categorize them correctly. These aren’t billing failures, but strategic choices to serve patients in need. Treating them as such helps clarify the true financial picture of a business.
For example, a counseling center that quietly provides $12,000 worth of hardship-adjusted sessions each year can record that amount as a distinct line item, separate from insurance write-offs or patient nonpayment. It might not show up in cash flow, but it still reflects care delivered. Tracking that distinction gives providers better insight into what portion of services are offered below standard rates, and how that affects revenue and sustainability.
Even if there’s no formal charity care reporting requirement, accrual accounting allows healthcare practices to tell a more accurate story, and one that honors both their mission and their bottom line.
Implementing Accrual Accounting: What It Takes
Transitioning to or improving accrual accounting systems isn’t about hiring a bookkeeper; it’s an operational shift that requires aligned technology, processes, and expertise. Healthcare providers need systems that can integrate with billing software, electronic health records, and payroll tools. They also need workflows that support consistent monthly closings, proper categorization of revenue and expenses, and financial reviews.
Larger practices may benefit from engaging a healthcare-specific CPA firm or outsourced accounting service that understands industry regulations and offers ways to analyze and even predict payer behaviors.
Common Pitfalls and How to Avoid Them
Even experienced finance teams can run into trouble with accrual accounting, especially when reporting deadlines are tight or internal controls are underdeveloped. Some of the most common missteps include:
- Failing to match revenue with associated expenses in the same period, which can distort margins. This can often be corrected by implementing month-end closing checklists that ensure all earned revenue and related costs are recorded together.
- Misclassifying prepaid expenses or deferred revenue, leading to inaccurate financials. Clear labeling within the chart of accounts, along with training for staff on how to recognize these items, can prevent this issue.
- Overlooking bad debt estimates from uncollectible insurance claims, which may inflate expected income. Periodic reviews of historical collection rates help refine these estimates and improve forecasting.
- Ignoring charity care accounting requirements in nonprofit filings, which can trigger IRS scrutiny. Designating a line item for uncompensated care and documenting eligibility criteria ensures these services are properly reported.
Each of these pitfalls can lead to budgeting issues and compliance risk. That’s why healthcare organizations must maintain clear documentation and invest in well-structured accounting policies. While accrual accounting does offer greater clarity, it only works when applied with consistency and oversight.
Accrual Accounting as a Strategic Advantage
Whether aligning revenue with expenses, managing grants, or separating sliding-scale care from uncollected debt, accrual-based reporting supports smarter decisions.
That value only grows as the landscape shifts. More healthcare organizations are adopting integrated cloud-based systems that sync EHR data with accounting platforms, helping teams close books faster and track service-line profitability. Also, accurate tracking of medical equipment and depreciation is gaining ground as practices expand or invest in specialized tools, especially under tighter audit and grant scrutiny.
For nonprofit providers, the pressure to report executive pay, community benefit, and charity care is also intensifying. But transparency isn’t just a nonprofit concern anymore. Patients, funders, and regulators all want to know: How is care being delivered…and at what cost?
In that environment, accrual accounting becomes more than a method. It becomes a management strategy. The clinics and practices that treat it that way and not as an afterthought, are the ones better positioned to thrive.
